Unlikely, but based on the shockingly awful data now flooding out of an imploding Chinese economy it's no longer totally inconceivable. In October, exports in RMB terms fell over 10% yoy, but despite this the trade surplus hit a record $35bn. The explanation is a collapse in imports (not just because of the commodity price slump, but also by volume) which is very bad news for Asian exporters into China. Other measures that cannot be massaged by government statisticians suggest economic free fall; electricity consumption for instance is down 9.6% in November, reflecting huge industrial contraction such as pig-iron production down 16% and raw steel down 12%. I predicted that the export/investment based growth model in China was set to collapse back in March in China 'Miracle' Faces Meltdown at a time when the consensus was wildly bullish, and forecast that GDP growth would halve to mid single digits. That would now be a very good outcome, and I think the country could well flirt with outright deflation (which cannot conceivably occur in the US despite the media hype). A key mistake made by the Fed in the 1930's Depression (and one identified by Ben Bernanke in his PhD thesis) was to constrict money supply at a critical juncture after the Wall Street crash, and that is an error the current Fed is taking extreme pains not to repeat. However, Chinese authorities, lacking that institutional memory, are set to repeat this mistake just as the country's merchandise exports slump despite ever increasing export subsidies and a recently depreciating currency. I've discussed the strange distortions of the closed Chinese capital account previously (and the huge 'informal' banking sector), but the massive flows of speculative foreign capital betting on an RMB revaluation until the Summer undoubtedly boosted Chinese inflation, which has since tumbled from over 9% to just 2% in November (on a PPI basis) against 6% the previous month; that screams serious monetary contraction to me, as do slumping asset prices.

China's financial infrastructure remains primitive and dysfunctional compared to its physical and industrial one, and that raises the risks of underestimating the severity of the crisis the country now faces; disjointed as the US response has been, at least the Fed and Treasury have transparent and deep capital markets to reflect economic stress. The greatest risk for 2009 is that China's financial immaturity causes it to pursue unsustainable trade policies that ignite a political backlash in the US (Germany is being equally intransigent in accepting the new reality but that's another story). Ultimately, as I've explained in previous posts, the US trade deficit will steadily disappear as consumers forcibly retrench and the US private sector savings rate climbs to 8-10%. China will be the biggest loser, and had better find a Plan B fast, which will essentially involve boosting domestic consumption, particularly in labour intensive service sectors, from structurally depressed levels rather than pouring more concrete (See my 11 November post China: Following Japan's Failed Reflation Model) Policies that attempt to sustain the unsustainable, whether Chinese export growth or US consumption levels, are set for destabilising failure medium-term, but may succeed in boosting flagging growth in coming months. While the lagged impact of the oil price crash and unprecedented fiscal and monetary stimulus mean the US housing market and broader economy should be tentatively recovering by end 2009, China will struggle to generate the 6-8% GDP growth necessary to avoid rising unemployment and possibly violent social unrest like that rocking Greece recently. While Greece has suddenly woken up to the explosive danger of 25% youth unemployment (and France, Italy etc may not be far behind) China additionally faces a growing demographic surplus of tens of millions of young males, who if allied to angry laid-off industrial workers, could cause historic upheaval. China need to loosen the monetary spigots and fast to avoid this scenario. When the Chinese say 'May you live in interesting times' they mean it as a curse.